BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: V. K CHOPRA, WHOLE TIME MEMBER
Against Monarch Projects and Finmarkets Ltd. and its directors viz. Shri Rajeshkumar V Patel, Shri Ashwin P Patel, Shri Yogesh J Shah, Shri Kamlesh M Shah, Shri Mahendra P Vora, Shri Narendra Kapoor, Shri Pravinkant V Desai and Shri S M Gupta in the matter of failure to exercise due diligence in the public issue of Dhanlaxmi Lease Finance Ltd.
DATES OF HEARINGS: 06.12.2006, 03.01.2007, 15.01.2007 and 19.11.2007
APPEARANCES:
FOR THE COMPANY/ DIRECTORS / PROMOTERS:
- Shri Gaurav Joshi and Ms Rea Zaiwalla, Advocates with Shri Suresh Bafna and Shri Sanjay Mota, Company Secretaries attended for Monarch Project and Finmarkets Ltd.
- Shri Vinay Chauhan and Ms Kirti Sasnur, Advocates with Shri Kamlesh M. Shah
- Shri Pravinkant Desai.
- Shri Narendra Kapoor
- Shri Mahendra P. Vora.
FOR SEBI:
- Shri Sanjiv Dutt, CGM
- Shri Mohamed Rahaz P. M., Legal Officer
- Ms Muthulakshmi K, Manager.
ORDER
Under Section 11 (4) read with 11B of the Securities and Exchange Board of India Act, 1992.
1. Dhanlaxmi Lease Finance Ltd. (hereinafter referred to as “Dhanlaxmi”) is an Ahmedabad based finance company which was incorporated as a public limited company on February 24, 1995 with the Registrar of Companies, Gujarat. The business activities of Dhanlaxmi comprises of financing, hire purchase and leasing and it came out with a public issue of Rs 31 lakh equity shares of Rs 10/- each for cash at par aggregating to Rs 310 lakhs. The issue opened on November 21, 1995 and closed on November 24, 1995. The issue was oversubscribed to the extent of 2.5 times as per the 3 day report filed with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) by the Lead Manager, Monarch Projects and Finmarkets Ltd. (hereinafter referred to as “Monarch”).
2. SEBI received a complaint from the Tax Payers Protection Counsel, Ahmedabad alleging several malpractices in the said public issue and price rigging. SEBI conducted investigations into the multiple, fictitious and benami applications made by certain entities and acceptance of this application by the Bankers to the issue even two weeks after the closure of issue. It has been alleged that the Lead Manager to the issue, Monarch and its directors viz Shri Rajeshkumar V Patel, Shri Ashwin P Patel, Shri Yogesh J. Shah, Shri Kamlesh M Shah, Shri Mahendra P Vora, Shri Narendra Kapoor, Shri Pravinkant Desai and Shri S M Gupta had violated clauses 1, 2 and 9 of the Code of Conduct prescribed under Schedule III of Regulation 13 of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, Regulation 3 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and Section 73 of the Companies Act, 1956.
3. As the registration of Monarch has expired in the year 2001, show cause notices were issued under Section 11B of SEBI Act read with Section 11(4)(b) of the SEBI Act to Monarch and its directors to explain as to why directions including debarring them from accessing the securities market be issued.
4. Show Cause Notice dated October 25, 2005 issued to Monarch, was responded through their Advocates, Mulla & Mulla & Craigie Blunt & Caroe vide their letter dated January 15, 2007 after they received the notice of personal hearing dated January 12, 2007. The main contentions therein are given hereunder:
4.1 They are acting as a trading member of NSE in the name of “Monarch Project and Finmarkets Ltd.” with absolutely clean record in as much as its present broking business is concerned. The present company has established itself all over the country with 32 branches and its turnover is about Rs 80-90 crores per day with approximately 16,000 active retail clients. In addition to that it had also three Foreign Institutional Investors and two Financial Institutions registered with it, whose trading volume averages about Rs. 1.5 crores per day. For the financial year ended 2005-2006, it generated gross brokerage of Rs 3,14,00,000/-. It is also registered DP of NSDL with approximately over 8800 active clients.
4.2 They have submitted that they are not carrying out any business relating to Merchant Banking or any other business of the erstwhile Monarch. They further stated that they have acquired the right to act as a trading member of NSE from erstwhile Monarch by executing a Memorandum of Understanding dated June 18, 1996 and a supplementary agreement dated August 31, 1997. As per these agreements, all nominee directors of the erstwhile Monarch have to exit and complete managerial control will vest with Shri Ashok Bafna and Shri Vaibhav J. Shah and at the same time Shri R. V. Patel will continue in the present management with 51% holding.
4.3 They have already applied to NSE for change in management to acquire 51% holding of Shri R. V. Patel.
5. Kamlesh M Shah: Show Cause Notice dated May 17, 2004 issued to him was replied vide his letter dated June 03, 2004 as under:
5.1 Three day monitoring report submitted on November 27, 1995 shows a collection figures of Rs 590/- lacs whereas the 78 days monitoring report shows total collection of Rs 819.39 lacs and the reason for such a discrepancy was because that the communication infrastructure and Banking infrastructure was not much strong enough to give exact collection figures as being done today as well as the clearing procedure of issue collection cheques were also taking time when majority applications were accepted on last days. Further, there were series of Public issues in the year 1995 and the Bankers to the Issue were also flooded with the work overload in public issue management which might have led to late clearing of the issue collection cheques.
5.2 The work of gathering the information for issue collection proceeds were being done by the Registrar to the Issue and the Bankers to the Issue. As Lead Manager, they were receiving the collection figures from the Registrar to the Issue and submitting the Monitoring reports as per requirements of SEBI. According to him, the Lead Manager is supposed to give only those information which have been passed on to them by Bankers to the Issue and Registrar to the Issue.
5.3 As regards the identification and elimination of applications received after the closure of the issue and removal of multiple / benami applications, he submitted that the Bankers to the Issue make collections of share applications on an all India basis and after a long period of nearly about 15 days. After making collection of the issue proceeds all the applications were sent directly to the Registrar to the Issue who in turn then process the same to prepare a list for finalization of the basis of allotment. In this entire administrative process lead managers are no where called upon and involved. Further when the entire lot of applications are submitted to the registrar to the issue, it is difficult to identify on an individual basis as to which particular applications were accepted late by the Bankers to the Issue or on the basis of the application forms it is difficult to identify as to whether the applicant is a real genuine applicant or a Benami applicant.
5.4 The work for identification of incomplete application forms, identification and removal, rejection of multiple applications were done on the basis of the definitions for multiple applications given in the prospectus and the SEBI circulars, guidelines, notifications etc. This work is done by the Registrar, they identify and put a list of such applications before the final procedure of allotment and such applications after due care are being rejected as per norms. He stated that the said procedure was exercised at their level by co-ordinating with the Registrar to the Issue.
5.5 While processing, whether any application is benami or real it is difficult to identify. As lead manager, they had ensured that the Registrar to the issue has accounted all applications received in public issue, identified the multiple applications as per prospectus, completed reconciliation of share applications, issue proceeds, cash and stock invest collection figures with the final certificates issued by each and every branch of Bankers to the issue etc. He submitted that they had discharged their responsibilities with due diligence.
5.6 As regards the charge of failure to exercise due care and diligence for the issue procedure, listing of securities, issue of refund orders, dispatch of share certificates, transfer of issue proceeds and compliance with the code of conduct prescribed under SEBI Merchant Bankers Regulations, he submitted that they being the sole lead Merchant Bankers to the Issue of Dhanlaxmi, had complied with all requirements as per the due diligence certificate dated August 02, 1995.
5.7 He submitted that he or the company were not involved in any fraudulent and Unfair Trade Practices relating to Securities Market as they were not involved in making of any false or benami applications for shares and they were at any time involved in trading in the scrip of Dhanlaxmi.
5.8 As regards the charge of failure to keep total share application money in separate Bank Account in compliance to Section 73 of the Companies Act, he submitted that the entire responsibility to show and keep the issue proceeds in separate Bank account is of the Bankers to the Issue only.
5.9 He has also pointed out that similar complaints were also forwarded by Tax Payers’ Protection Council to the Central Bureau of Investigations, Gandhinagar. The CBI Authorities had also summoned them for obtaining necessary information, investigations etc and they had gone to CBI head quarter in Gujarat at Sector No. 10 at Gandhinagar alongwith all office copy documents relating to the Public Issue of Dhanlaxmi. CBI officials had seized entire office copy documents file relating to Dhanlaxmi. Hence, he or the company had no documentary evidence at present to support the above stated statements, submissions and information.
5.10 He also submitted that during the course of investigation, CBI officials in this entire matter had already found the real accused persons who were involved in the making of multiple, fictitious applications and who were involved in the scrip price manipulations and who were involved in the unfair trade practices relating to securities markets. On the basis of the investigation report of the CBI submitted to Department of Company Affairs, New Delhi, and on the advise of DCA, New Delhi, the Registrar of Companies have already filed necessary criminal prosecutions in the criminal court at Ahmedabad in this matter against all the accused persons. He added that they had not been found guilty by CBI officials in this investigation process as they have not filed any criminal prosecution against him or the Monarch Project and Finmarkets Limited.
5.11 He stated the no direction as stipulated in the show cause notice is required as none of the directors of the company who were handling merchant banking division are at present SEBI Authorised intermediary and the company had surrendered / not renewed the licence of merchant bankers category issued by SEBI on the renewal due date.
6. Mahendra P Vora: Show Cause Notice dated January 13, 2004 was issued to him to which he replied vide letter dated January 28, 2004. He stated that he was appointed as a director of Monach w.e.f. February 01, 1994 and he ceased to be a director of Monach w.e.f. October 01, 1995. He further stated that the public issue in question opened for public subscription on November 21, 1995 and closed on November 24, 1995 and the violations were alleged to have been committed during the said period or subsequent thereto. He pointed out that since he ceased to be a director w.e.f. October 01, 1995 he was neither aware nor concerned with the alleged irregularities.
7. Narendra Kapoor: Show Cause Notice dated May 17, 2004 was issued to him to which he replied vide his letter dated June 14, 2004. He stated that he was not a director of Monarch as he neither received any notice of Board Meeting nor attended any Board Meeting and he is ready to file an affidavit to that effect. He stated that even if, company has appointed him as a professional director, he ceased to be a director in terms of section 283(1)(g) of the Companies Act, 1956. He further stated that he did not have any knowledge about grant of licence to Monach by SEBI to act as a Merchant Banker and their role as a lead manager to the issue in respect of Dhanlaxmi.
8. Pravinkant V Desai: Show Cause Notice dated December 23, 2003 was issued to him to which he replied vide his letter dated January 20, 2004. He has given his professional background in his reply stating that he was from the field of management education which includes teaching at MBA programmes and executed training programmes since 1976. After working at IIM Ahmedabad on assignment basis, he had joined University School of Business Management at Gujarat University, Ahmedabad as its Founder Director in June 1976. After spending 5 years there, he was invited by Bharatiya Vidya Bhavan, Mumbai to join S P Jain Institute of Management as a Founder Faculty. Later on he was assigned the role of Joint Director and Officiating Director. In 1989, he was awarded UNDP Fellowship, which was executed in the USA as a Visiting Scholar to University of Michigan. After returning from the USA, he had re-established himself in Ahmedabad. Considering his professional qualifications and image that he had re-established himself in Ahmedabad after spending 11 years in Mumbai, Mr. Kamlesh M Shah who happens to be a distant relative of his, had requested him to join the Board of Monarch as a professional, non-executive director. He accepted this entirely as a social commitment and there was no intention to create any financial or economic stake in Monarch. He stated in his reply that he had resigned from Monach in the year 1996 and he did not play any role in formation or promotion of Monarch. He added that he did not hold any of its shares and had not participated in any policy decision or in the day to day management of Monarch. In view of this, he requested to withdraw the show cause notice served on him.
9. S M Gupta: Show Cause Notice dated May 17, 2004 and a reminder letter dated August 23, 2004 were issued to him to which he replied vide his letter dated September 05, 2004. He stated that he had not been engaged in direct activities of the business of Monach and never attended any board meeting. He further stated that his consent to act as a Director was a simple formality and his consent was obtained in good faith which he has withdrawn subsequently.
10. Shri Rajeshkumar V Patel, Shri Ashwin P Patel, Shri Yogesh J Shah: Show cause notices dated July 04, 2007 were issued to them and also posted the said show cause notices on SEBI website. Shri R.K Patel vide his letter dated August 24, 2007 had requested the relevant documents/statements in order to file reply. Accordingly, 3-days monitoring report and 78 days monitoring report were sent to him on September 20, 2007. But it was returned undelivered from the same address from where Shri Rajeshkumar V Patel had sent his letter dated July 04, 2007.
11. Opportunities of personal hearing were given to all the Noticees before me at SEBI’s head office at Mumbai and the details whereof are given hereunder:
11.1 Shri Suresh Bafna and Shri Sanjay Mota, Company Secretaries of Monarch alongwith Shri Gaurav Joshi and Ms. Rea Zaiwalla, Advocates attended the hearing on January 15, 2007 for Monarch. As stated above, they had filed a written submission on the same day and also produced certain documents.
11.2 Shri Kamlesh M. Shah alongwith his advocates, Shri Vinay Chauhan and Shri Kirti Sasnur attended the hearing on January 03, 2007 before me. They have reiterated their submissions put forwarded in their reply to the show cause notice.
11.3 Shri Mahendra P Vora attended the hearing on December 06, 2006 and also filed written submission received on December 19, 2006 and he reiterated the contentions as already stated in his reply to the show cause notice.
11.4 Shri Narendra Kapoor attended the hearing on January 03, 2007 and also filed his written submissions dated January 09, 2007 alongwith an affidavit stating that he was not aware about his appointment as director of the company and never attended any Board Meeting or signed any paper / document on behalf of the company. Shri Kapoor claimed that in case the company had appointed him as a director, the same should be considered as ceased as per section 283(1)(g) of the Companies Act, 1956. He also filed an affidavit swearing that he was not aware about grant of licence to the company Monarch to act as a Merchant Banker and its subsequent role as a Merchant Banker to the issue in respect of Dhanlaxmi.
11.5 Shri Pravinkant V Desai attended the hearing before me on January 03, 2007 and reiterated the submission as he had already made in his above reply to the show cause notice.
11.6 Shri S. M. Gupta was given opportunities of personal hearing on December 06, 2006, January 03, 2007 and January 29, 2007. After seeking adjournment on some reasons, a final opportunity of personal hearing was granted on February 20, 2007 which he failed to avail.
11.7 Opportunities of personal hearing given to Shri Rajeshkumar V Patel, Shri Ashwin P Patel and Shri Yogesh Shah were not availed by them.
12. I have carefully examined the show cause notices, replies to the show cause notices and my findings are as follows:
13. Monarch was the post issue Lead Manager to the public issue of 31,00,000 equity shares of Dhanlaxmi. The said public issue opened on November 21, 1995 and closed on November 24, 1995. Investigations conducted by SEBI revealed that the Lead Manager, Monarch failed to keep the funds collected in the issue in a separate account and also observed discrepancy in its 3 Day Monitoring Report wherein the amount collected was mentioned as Rs. 596 lacs whereas its 78 Days Monitoring Report mentioned that the amount received was Rs. 819.39 lacs. As per the Due Diligence Certificate dated August 02, 1995, the following responsibilities were vested with Monarch:
· Follow up with the Bankers to the Issue to get quick estimates of collections and advising the Issuer about the closure of the Issue, based on the correct figures.
· Follow up the post issue activities including ensuring compliance of listing of instruments and dispatch of certificates and refunds, with the various agencies connected with the work such as Registrars to the issue and the bank handling refund business. Even if, any of these activities are handled by other intermediaries, Lead Manager will be responsible for ensuring that these agencies fulfil their functions timely, enabling the Lead Manager to discharge their responsibility through suitable arrangements with the issuer company.
· Comply with stipulated requirements and completion of prescribed formalities with Stock Exchanges, Registrar of Companies and SEBI.
14. Shri Kamlesh M. Shah in his reply dated June 03, 2004 inter alia stated that the requirements stated in the paragraphs above were complied with by following up with the Bankers to the Issue, Issuer company, Registrar to the issue etc. and listing of shares was done in time as per the listing agreement. He has also stated that a separate bank account was opened with the controlling bank branch of each Banker to the Issue to credit and keep the entire issue proceeds. Further, Monarch had also ensured that the bankers does not allow the company to utilise the issue proceeds lying to the credit in the separate bank account audit was disbursed only after providing the letter to the bankers showing the permission of listing of shares of the issuer company. I do not find any cogent evidence to disprove the above contentions.
15. Further, I find that Shri Narendra Kapoor and Shri Mahendra Vora had resigned from Monarch on September 01, 1994 and October 01, 1995 respectively and the charges levelled against them for the alleged irregularities and malpractices in the public issue which opened for public subscription on November 21, 1995 and closed on November 24, 1995 are not sustainable, since they had resigned from Monarch prior to the public issue in question.
16. Shri Pravinkant V Desai and Shri S. M. Gupta submitted that they were not involved in any of the affairs of the company. Shri Pravinkant V Desai stated that he did not play any role in formation or promotion of Monarch and did not hold any shares of Monarch and he did not participate in policy decision or in the day to day management of Monarch. He further added that considering his professional qualification, Shri Kamlesh M. Shah, who happens to be his distant relative, had requested him to join the Board of Monarch as a professional, non-executive director and the said offer was accepted by him as a social commitment. Shri S. M. Gupta has also stated that he had not participated or attended any of the Board Meeting of Monarch and never handled the day to day affairs of the company. I do not find any evidence to prove that they have actively participated in the affairs of Monarch at the relevant time and as such the charge against them is not sustainable.
17. The only allegation in the show cause notice is that of discrepancy in three day monitoring report which shows a collection figures of Rs 590/- lacs whereas the 78 days monitoring report shows total collection of Rs 819.39 lacs. Shri Kamlesh Shah has explained the reason for such a discrepancy in his reply as stated in paragraphs no 5 above. Apart from this charge, there is no other charge against Monarch and its directors in the show cause notice regarding their role in the alleged malpractices like making or accepting of multiple applications so to show the public issue oversubscribed or any other allegation regarding their role in price rigging. In view of this, benefit of doubt can be given to them as there is no concrete evidence to prove that they committed any manipulation or malpractices in the public issue of Dhanlaxmi. I have also noted that the registration of Monarch as a Merchant Banker expired in the year 2001 and their certificate of registration as a Merchant Banker is no longer subsisting. In view of this, I do not find this a fit case to impose any prohibitory direction on Monarch and its directors.
18. Taking into consideration the facts and circumstances of the case and in exercise of the powers conferred upon me under Sections 19 of the SEBI Act read with Sections 11B and 11(4) of SEBI Act, 1992, I hereby dispose off the show cause notices issued to Monarch Projects and Finmarkets Ltd, Shri Rajeshkumar V Patel (PAN No. ABCPP2582R), Shri Kamlesh M Shah (PAN No. ACWPS4825K), Shri Ashwin P Patel, Shri Yogesh J Shah (PAN No. ACZPS3395M), Shri Mahendra P Vora, Shri Narendra Kapoor, Shri Pravinkant V Desai and Shri S M Gupta as above.
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Place: Mumbai
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V. K. CHOPRA
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Date : January 23, 2008
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WHOLE TIME MEMBER
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SECURITIES AND EXCHANGE BOARD OF INDIA
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